Industry AnalysisChris Athens, Ben Baker, Josh Carver, Chris Bolinger, Jordan Guenther, Justin Turner, Jeff Ward

Background & Purpose

• Founded by 2 brothers• Franchising “McDonald’s• Phoenix, Arizona• Neil Fox- National Perspective• Ray Croc- Agent for growth• 120 Countries, 31,000 Restaurants• Growing Franchises- 60% of Sales

Problems, Challenges, Issues

• Growing Revenues • Dropping Profit Margins• GRAPH

Issues In Customer Service

• 100 point scale• Increasing Rating, but still behind average• 11 points below avg.• 2008- Rated 69 out of 100• High Turnover Rates

Contrasting Viewpoints

• Expansion, Growth -While maintaining innovation

• Plans- Increase sales and income

Health Issues

• Shift in Demand• High Calories to Healthier Foods

• Example: Salads, Sandwich’s, Fruit & Yogurt

Competitors

• Wendy’s- 10,000 Restaurants System Wide-Frosty’s, Spicy Chicken, Baked Potato

• Jack in the Box-Adult Consumer, Chicken Bowls, Pitas

• Hardee’s-Quality, Higher Price, Breakfast Menu

• Sonic-3,500 Drive-ins in 2008, Accessible

Atmosphere

Economy Hurts the Industry

• “The root cause of the recession is the $4 trillion decline in the value of US homes, which may well total $8 trilion before prices hit bottom. Econometric evidence suggests that for every $1 decline in housing prices, homeowners cut back spending by about 6 cents. Using this formula, a $6 trillion drop in prices translates into a $360 billion annual decline in consumption-just under 3% points of GDP.” (Schmitt)

Economy Hurts the IndustryGross Domestic Product

10960.8

11685.9

12421.9

13178.413807.5

14280.7

0

2000

4000

6000

8000

10000

12000

14000

16000

2003 2004 2005 2006 2007 2008

Year

Bil

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Economy Hurts the IndustryChanges in Gross Domestic Product

6.62%

6.30%6.09%

4.77%

3.43%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

2004 2005 2006 2007 2008

Year

Perc

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DP

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ear

Economy Hurts the IndustryConsumer Price Index Changes

2.7%

3.4%

3.2%

2.8%

3.8%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

2004 2005 2006 2007 2008

Year

Per

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han

ge

Economy Hurts the Industry

•Finished consumer prices rose 8.3%

•Menu prices rise 6%

•2.3% absorbed by the industry

Market Size•2008 - Industry sales totaled $548 billion

•2.49% increase from 2007Percent Increase in Sales

4.41%

10.45%

5.14%

10.00%

2.49%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

2004 2005 2006 2007 2008

Year

Per

cen

tag

e In

crea

se

Market Size

Porter’s 5 Forces

1.Threat of substitute products

2.Threat of entry of new competitors

3.Competitive rivalry

4.Customer bargaining power

5.Supplier bargaining power

Porter’s 5 Forces - 1. Threat of substitute products

Frozen take-home meals have become a major threat to the fast food industry. Companies are able to produce high-quality tasty frozen dinners that satisfy most consumer tastes (healthy, ethnic, or dietary.)

Porter’s 5 Forces - 2. Threat of entry of new competitors

There are new competitors opening daily. The industry must battle one another as well as the family-owned entities. Many small businesses are able to capture small segments of the market by catering to certain tastes.

Porter’s 5 Forces- 2. Threat of entry of new competitors(continued)

FAST FOOD CHAIN MOM & POPs

Economies of scale Cater to specific market

Automatic brand recognition Buy and support locally

Large startup capital Vested interest

Not as easy to adjust to local Limited resources

market Slow startup process

Stigmas of “fast food”

Advantages

Disadvantages

Porter’s 5 Forces- 3. Competitive Rivalry

Since the top 7 hold most of the market share, they are constantly trying to win over one another's customers. The average American spends $492 per year at fast food establishments.

Based on that estimate, Lubbock spends….

$98,400,000 on fast food each year.

Now the top 7 are trying new ways to be innovative and help offset the rising costs:

• Value meals

• Off-peak deals

• Reduced pricing

Porter’s 5 Forces- 4. Customer Bargaining Power

Customer do not have bargaining power once they are in the line to order. It all begins when they choose to go to a particular eating establishment. Customers as a group have a tremendous amount of bargaining power. Subway has recognized this and has introduced 2 new ideas in their mix.

• 5 sandwiches with 5grams of fat or less

• Adding these sandwiches to the $5 footlong menu

After the documentary “Super Size Me” came out, the bargaining power shifted to the customers. They demanded healthier selections and McDonald’s had no choice but to conform to the customers’ demands.

Porter’s 5 Forces- 5. Supplier Bargaining Power

The supplier side of the industry is divided into two groups:

1. Commodities

2. Beverages

The commodities side has very little bargaining power since most of the prices are determined by the market. The only aspect in which commodity suppliers have bargaining power is transportation costs. This is something that they can manipulate to win new customers or satisfy existing ones.

The beverage market has two basic competitors: Pepsi and Coca-Cola. The fast food industry has formed alliances with these to ensure the best price. This is one area in which the supplier has the most power.

Strengths Weaknesses Opportunities Threats•Global Brand

•Diversified Geographic Presence

•Strong Supply Chain Capabilities

•Large Scale of Operation

•Fluctuating Operating and Net Profits

•Growth of Franchisee Operated Restaurants

•New Products

•Beverage Market

•Change in Commodity Prices

•Food Safety and Food Borne Illness Concerns

•Fresh Threat of Bird Flu

SWOT Analysis

McDonald’s Strengths:Global Brand

• McDonald’s has a well established brand that appeals to customers of all age groups and nationalities

• McDonald’s strong brand helps to draw customers to the restaurants and provides it acceptability in new markets

McDonald’s Strengths: Diversified Geographic Presence

• In 2007, the company operated 31,370 fast food restaurants in over 180 countries– United States– Europe– Asia– Middle East and Africa– Latin America– Canada

McDonald’s Strengths:Strong Supply Chain

• The company and its partners purchase food and related items from an approved group of suppliers

• McDonald’s has specified quality standards to be met by all of its suppliers

McDonald’s Strengths:Large Scale of Operation

• McDonald’s had a revenue in excess of $22.7 billion in 2007

• The company is the world’s largest food service retailing chain

• McDonald’s has bigger scale, in terms of revenues, to compete with other players in the market

McDonald’s Weaknesses:Fluctuating Operating and Net Profits

• The company’s operating and net profit has registered decline in every alternate year

• Fluctuating operating profits and declining net profits would negatively impact the investor confidence

McDonald’s Opportunities:Growth of Franchisee Operated Restaurants

• McDonald’s is planning to significantly increase its count of franchisee operated restaurants

• The transition of company-operated restaurants to franchisee and developmental license structure is likely to increase the overall profitability of McDonald’s

McDonald’s Opportunities:New Products

• McDonald’s launched many new products in 2008:– Southwest salad– Cinnamon melts– McSkillet Burrito

• In 2009, the company’s key areas of focus will be breakfast, chicken, beverages and convenience

McDonald’s Opportunities:Beverages Market

• The global hot drinks market was valued at $63.4 billion in 2007

• In 2011, the market is forecast to have a value of $71.4 billion

• The expected growth in the beverages category will offer the company opportunities for expanding its revenue base

McDonald’s Threats:Changes in Commodity Prices

• McDonald’s may get affected by the price fluctuations in beef, chicken and cheese

• Also, the company remains susceptible to increases in food costs as a result of our current economic conditions

• Any increase in these commodity prices will have an impact on the operating costs of the company

McDonald’s Threats:Food Safety and Food-Borne Illness

• The company must ensure that food and quality are of the highest standards

• The occurrence of food-borne illnesses or food safety issues could adversely affect the price and availability of affected ingredients

McDonald’s Threats: Fresh Threat of Bird Flu

• The threat of bird flu is once again on the rise throughout the world

• The outbreak of diseases such as bird flu and mad cow disease exerts a downward pressure on the consumption of poultry and meat products all over the world

Industry Forces

• In the United States alone, about one-quarter of the adult population visits a fast food restaurant daily

• In a short time period, the fast food industry has transformed the American diet as well as our landscape, economy, workforce, and popular culture.

Industry Forces

• The fast food industry has grown at an extraordinary rate which has been driven by fundamental changes in American society.

• Americans spent about $6 billion on fast food in 1970 while spending more than $110 billion in 2000.

• In 1975, less than one-third of American mothers with young children had jobs outside the house. Today, that number had increased to almost two-thirds.

Competitive Position

• As the growth of McDonald's, Burger King and other large fast food chains continues to be generally positive, the performance for most casual chains is weak

• McDonald's and Burger King each achieved "meaningful" same-store sales increases last year, reflecting their leveraging of breakfast, snack and late-night opportunities according to the S&P analysts.

Competitive Position

• The report also stated that casual- and family-dining chains saw same-store sales that generally ranged from mid-single-digit declines to modest increases, with performance worsening as the year progressed.

• This lack of progress is a direct effect from the weakening global economy.

• Most that saw gains did so as a result of price increases that offset traffic declines

Competitive Position

• McDonalds posted a 7.1 percent worldwide increase for the month of January of this year

• KFC it creating up to 9,000 jobs in Great Britian

Competitive Position

• The most recent data shows that Taco Bell is close to the bottom after an 11 percent same-store sales decline.

• Most of the blame for Taco Bell’s most recent downfall can be placed on their own shoulders following a recent e-coli outbreak and a widely publicized rodent infestation at a New York restaurant.

Competitive Moves

• The next competitive moves that will be made in the fast food industry will be:

– the growth of the value menu

– the expansion into developing countries

Competitive Moves- Value Menu

• Wendy’s for years has been the home of the value menu. Their value menu started in 1989 and years later McDonald’s would create their dollar menu in 2002.

• With the recent economic crisis, many people have turned to the value menu to help keep money in their pockets

• The value menu is going to become the next move made by many companies in the fast food industry

• Sonic has already implemented their own version of a dollar

menu which offers their smallest items for only a buck.

Competitive Moves- Expansion

• The major fast food companies such as Burger King, McDonalds and KFC and been entering markets around the world for many years

• As developing countries continue to grow, it is believed that

fast food companies will grow right with them • The latest reports show that the economic development has

fueled urban growth while it is also driving per capita incomes higher in these countries

• As a result, the proportion of people living in extreme poverty

and hunger is slowly shrinking.

Competitive Moves- Expansion• The latest projections by the World Bank show income per person in the developing countries

growing at an annual rate of 3.4 percent for the period 2006-2015, twice the 1.7 percent registered during the 1990s.

Strategic Groups

• Fast food industry started when McDonald’s opened in 1955.

• Includes McDonald’s, Wendy’s/Arby’s, Burger King, Jack in the Box, and Hardee’s.

• Restaurants in many geographical locations across the world.

• Offer low quality food at a low price, in a short amount of time.

Strategic Moves

• Fast food restaurants initially began acquiring other fast food restaurants.– McDonald’s acquired Boston Market, Chipotle Mexican

Grill, and Donato’s Pizza. – Wendy’s acquired Tim Horton’s and Baja Fresh.

• Restaurants now are attacking industry by themselves.• Some still own other restaurants, but majority are on

their own.– McDonald’s owns Pret A Manger and Piles Café– Triarc Company owns Wendy’s and Arby’s

Strategic Moves

• Global expansion have dramatically increased.• McDonald’s operated 30,000 local stores as

well as stores in over 100 countries.– Serves 52 million customers a day.

• Wendy’s/Arby’s runs over 10,000 restaurants in over 20 countries worldwide.

• Burger King has 11,100 stores in 71 countries.

Strategic Changes

• The introduction of nutritious items.• Many of these restaurants offer salads, wraps,

chicken sandwiches, fruit and yogurt parfait’s, and other side options.

• In order to attract the parents and adults, these restaurants had to make the menu change.

• Can eat a meal under 600 calories.

Competitive Advantages

• Fast food restaurants offer meals at a cheap price in a short time span.

• The cheap price allows people to eat even in bad economic times.– The invention of the dollar/value menu

• The quickness allows people to eat in 30 minutes or less, which enables them to get back to work or whatever is on their schedule.

The Economic Crisis

• McDonald’s in America is recording record numbers and sales are through the roof.

(People want to save money at the dollar menu).

• In China McDonald’s is losing money, but still looking for new opportunities.

Employment Opportunities

• McDonald’s Europe, 240 new locations, 12,000 new jobs in Poland, Italy, France, Spain and Russia.

• McDonald’s China, 175 new restaurants, with 10,000 new job opportunities.

Preparation for competition

• McDonald’s vs. Starbucks

McDonald’s improves the quality of coffee and still competes on price.

Starbucks adds food to their menu while still serving a variety of high end coffee.

Economy meets Obesity

• Everyone wants to save a dollar.• This leads to more fast food/dollar menus.• The rate of obesity increases at an alarming

rate, but the public is more concerned with saving their money.

• Government wants to implement a plan of health.

Chef’s move to Fast Food

• Chef Paul Bocuse (the pope of French cuisine) along with many others in France have made the move to the fast food industry.

• Complaints of high priced food coupled with the financial crisis have lead to

“the historical turning point in cuisine”• This is good to some and bad to others,

depending on the perspective.

Any Questions?